Online tune-up for used-car markets

Linda Lo tried shopping for a car in the usual way, and like everyone else, she hated it. Lo, 24, is a manager at an online freelance placement company and has been in the market for a used car for more than a year. She tried Craigslist, but found it difficult to trust strangers on the site. Car dealerships were worse. The sales employees were either inattentive or cloying, the finances opaque, and the whole process was time-consuming and inconvenient. At one dealership recently, a salesman asked Lo, “Are you here with your parents?”

So a few weeks ago, Lo did what anyone her age does when confronted with a hurdle in the real world: She escaped it virtually. Lo found a novel online dealership, Beepi, which acts as a broker between sellers and buyers of used automobiles and which holds the potential to alter the image of the perilous used-car market.

Beepi had the exact car model Lo was looking for, down to the color: a red, 2014 Lexus IS 350, a luxury sedan that usually sells for around $40,000 (Rs 25,51,158). On Beepi, the car - which had undergone a 185-point inspection by the company’s mechanics, similar to an auto dealership’s “certified preowned” program - was $35,900 (Rs 22,89,664), including free delivery.

“The process was spectacular,” Lo said one recent morning outside her home in San Jose, California, as she waited for the car to arrive.

A few minutes later, a flatbed truck pulled up with the Lexus. A giant, gold bow was affixed to its hood. Neighbours thought Lo had won a sweepstakes.

Beepi’s rapid growth illustrates something deeper about the role the digital world keeps playing in our lives: There’s no limit to it. A few years ago, it seemed reasonable to assume there were some sectors of the economy that would resist the pull of the Internet and which most people felt were better left offline. Shopping for groceries or eyeglasses, say; now both those tasks are moving online.

Beepi and similar competitors, including Carlypso and Carvana, are pushing people to cross another threshold on the way toward a digital-only life. Although auto experts doubt that online-only car-buying experiences will become the norm, it would be wise not to discount their rise, for the simple reason that the Internet remains hungry. As people grow more accustomed to doing pretty much everything over computers and phones, the Internet tends to consume everything in its path.

Beepi began with a lemon of a used car. A few years ago, Ale Resnik, who was then at business school at the Massachusetts Institute of Technology, bought a 2010 Jeep Liberty from a dealership. It caught on fire while his wife was driving it and the dealer didn’t want to take it back. To Resnik, the failure seemed out of step with the way he shopped for most goods; it lacked transparency and consumer friendliness.

When Resnik began investigating the auto sales industry, he found that more than 90 percent of American car buyers consulted the Internet for purchases and a rising number of people worldwide say they would buy a car entirely online. According to a study by the research firm Capgemini, about a third of Americans and two-thirds of Chinese who were asked said they would buy a car over the Web.

To Resnik, the latent consumer interest was a starting point, and along with a friend, Owen Savir, he set out to create a system to bring to car shopping all the conveniences we’ve grown used to with other online purchases.

“We just thought that the car market was broken,” Resnik said.

At the core of Beepi’s business model is a pricing trick. There are three relevant prices for any used car. The trade-in price, which is what a dealer will give you for a your car; the private sales price, which is what you can get if you sold it directly to someone else; and the retail price, which is the price the car will command at a dealership. Dealers pay the trade-in price for vehicles and they sell them at the retail price. On some cars, that spread can be worth 50 percent.

Beepi thinks it can make a profit while operating within a tighter pricing band. When you list your car with the site, the company’s pricing algorithm, which consults data on historical car sales in your area, offers a price at least $1,000 (Rs 63,778) more than you can get by trading in your car at the dealer. That is still less than what you would get selling privately, but Beepi’s price is guaranteed. If your car doesn’t sell within 30 days of listing on Beepi, it will buy it from you.

On the other side of the transaction, Beepi sells cars at prices lower than comparable certified used cars at dealerships. It can do so, the founder says, because its overhead is lower - it doesn’t have to maintain parking lots to house cars, because the vehicles stay with the sellers until they are sold. Also, because it buys and sells cars over a wide area - currently, any city in California and Arizona - it can take advantage of supply and demand disparities in different regions. Finally, Beepi caps its own fee at 9 percent, depending on price and demand (it will take as little as 1 percent).

“When you put it together, we think you can give more to sellers, more to buyers, and make up to 9 percent of the price,” Resnik said.

But if Beepi is faster, more convenient, and a better financial deal than the traditional car market, it also suffers one huge downside. Beepi does not let buyers test drive cars before buying. Instead, it takes a page from other online retailers’ return policies. Like a pair of shoes from Zappos, Beepi’s cars come with a 10-day, try-it-out money-back guarantee. If you aren’t satisfied, the company will send a truck to take the car away free.

The company positions this as better than a dealer’s test drive. “It’s a 10-day test drive,” Savir said. But that could be a tough sell.

David Greene, an auto industry analyst for Cars.com, said he was skeptical that a large fraction of buyers would ever buy without test-driving a car.

“Our research shows that people don’t exactly know what they need until they get in a car and drive it,” Greene said. “While there’s a lot of things that people don’t care for when visiting dealerships, it’s hard to replace that personal interaction online.”

And if car buyers begin test-driving cars at dealerships only to buy at Beepi - the “showrooming” problem that has bedevilled many offline retailers - dealers may begin lobbying against Beepi’s rise, Greene said.